If my income is higher every year due to raises, do I need to worry about penalties from having too much taxes owed due to mutual fund distributions?

My understanding is that if your income is higher than it was the previous year(thus your taxes witheld is higher than the previous years taxes withheld) then you don't get penalized for owing over $1000.

Almost correct. If your taxes withheld is higher than the previous years tax liability you don't get penalized for owing over $1000. Your tax liability takes into account all of your income.

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